If you’d invested £1,000 in flooring manufacturer Victoria (LSE: VCP) back on 3 October 2012 when Geoff Wilding was appointed Chairman, and then re-invested dividends along the way, that stake would now be worth just over £50,000.
These fantastic shareholder gains have been driven by Wilding’s ambitious roll-up acquisition business model that has seen it go from a relatively minor player in the sector to a near billion-pound business with operations in the UK, Australia and Europe.
Looking at the company’s results for the year to March that were released this morning illustrates just how effective this model has been. Revenue for the year grew 29% to £424.8m while underlying operating profits leapt 45% to £48.8m. Much of this growth was driven by acquisitions but the group has also consistently laid down solid organic growth by bundling different flooring products together and offering stores more competitive prices that it can afford due to increased scale.
Over the long term, there’s still plenty of potential growth for Victoria as it executes its proven roll-up model in the massive European flooring market and branches out into other types of flooring such as ceramic tiles.
And as the company buys up smaller competitors it has shown it can significantly improve margins over time through increased purchasing power with suppliers, consolidation of back office and manufacturing functions, and improved scale in warehousing and distribution of its products.
Now, Victoria is not cheap with its shares trading at a premium valuation of 26 times trailing earnings. Furthermore, with net debt up to 2.68 times EBITDA following this year’s big acquisitions, the company will likely spend the next year deleveraging the balance sheet rather than making splashy purchases. However, with a great business model and plenty of growth opportunities in front of it, I still find Victoria an attractive buy-and-hold growth stock.
Succeeding while other retailers fail
The same is true of discount retailer B&M (LSE: BME), which trades at a 19.9 times forward earnings thanks to investors being impressed by the company’s growth strategy.
It’s true this is a lofty valuation compared to other retailers, but I also believe it’s warranted in the case of B&M. That’s because where other retailers are struggling, it is finding great success by opening new stores and driving increased like-for-like (LFL) sales at existing locations, thanks to unbeatable prices on a range of household goods and groceries.
Weak consumer confidence and dismal wage growth have led a broad swathe of the UK public to shop more frequently at both discount grocers and general stores. This trend helped drive the group’s sales up 21.4% in Q1 thanks to new store openings, the acquisition of the Heron Foods discount grocer, and a 1.6% uptick in LFL sales from B&M outlets.
In the years ahead I expect growth to continue at a low double-digit clip as the group opens around 50 new B&M stores annually, expands the presence of Heron in the UK and general discounter Jawoll in Germany, and uses its increased purchasing power and customer knowledge to drive further LFL sales growth.
With all these positive characteristics alongside sector-leading EBITDA margins of 9.4%, sustainable net debt of only 1.9 times EBITDA and a fast rising 1.72% dividend yield, I’m happy to own my B&M shares for a very long time.
